Capital gains tax on a rental property in Canada

Rental property capital gains calculator

Capital gain = sale price − (purchase price + land transfer tax and legal fees + improvements) − the selling costs and commission. Half of it is taxed at your marginal rate, after the share covered by the years it was your home. Depreciation (CCA) you claimed is added back in full. Open More if the buyer pays part of the price over the next few years.

A worked example

A rental bought for $450,000 (plus $6,000 of land transfer tax and legal fees and $25,000 of improvements), owned over 10 calendar years and sold for $850,000, at a 43% marginal rate (the calculator's starting numbers):

How capital gains tax on a rental works

1. Work out the cost (the adjusted cost base): what you paid, plus the land transfer tax and legal fees when you bought, plus improvements that made the property better than it was (a new roof, an addition, a finished basement). Repairs you already deducted from rent don't count.
2. Take off the selling costs: the commission and its HST, the lawyer, staging and advertising. Every dollar of selling cost lowers the gain.
3. Take off the principal residence share if you lived there for some of the years (below).
4. Half of what's left is the taxable capital gain. It's added to your income for the year of the sale and taxed at your marginal rate, so a big gain can push part of it into a higher bracket. In Ontario the top combined rate is about 53.5%, so the most a capital gain can cost is about 26.8% of it.
5. Add any CCA recapture (below), which is taxed in full.

The inclusion rate is still one-half

In 2024 the federal government proposed taxing two-thirds of gains over $250,000 a year, then deferred it to January 1, 2026, and in 2025 it cancelled the change. For a rental sold in 2026, one-half of the capital gain is taxable, however large it is. Older articles that still describe the two-thirds rate are out of date.

CCA recapture: the depreciation comes back

If you claimed capital cost allowance (CCA), depreciation on the building, over the years, it lowered the tax on your rent. When you sell for at least what the building cost, CRA adds all of it back to your income as recapture, taxed in full at your marginal rate, not at half like the gain (CRA, T4036 Rental Income). Land is never depreciated, so only the building part counts. If the building sells for less than what's left of its cost, you may get a terminal loss instead. Recapture can't be spread over later years.

Lived in it first? The principal residence exemption

For the years it was your home, the gain is tax-free. The exempt share is (1 + years you designate it as your principal residence) ÷ years you owned it, counting calendar years and including the year you bought and the year you sold. The "1 +" covers the year you move from one home to the next. Only one home per family can be designated for a year.

If you lived there first and then rented it out, the s.45(2) election (a letter filed with your return for the year you started renting) lets you keep designating it for up to 4 more years while it's rented, as long as you don't claim CCA on it in those years and don't designate another home. You report the sale and the designation on Schedule 3 and Form T2091 (CRA, principal residence folio). In the example above, 3 years lived plus the election cuts the tax from $73,606 to about $14,721.

Spreading the gain: the capital gains reserve

If the buyer pays part of the price later, for example through a vendor take-back mortgage, you can claim a reserve and pay tax on the gain as the money comes in. The catch: at least a fifth of the gain must be taxed each year, so all of it is taxed within 5 tax years however long the buyer takes to pay (CRA, claiming a capital gains reserve). Spreading it can keep more of the gain out of the top bracket. Set Share of the price the buyer pays later in the calculator to see each year.

Ways to lower the tax (legally)

• Keep every receipt for improvements. They raise your cost and lower the gain, even ones from years ago.
• Pay less to sell. On the example above, a flat fee MLS® listing leaves $18,743 more in your pocket than a 5% agent, after the slightly higher tax.
• Time the sale. Closing in a year when your other income is lower (retirement, a sabbatical) means a lower marginal rate.
• Use a capital loss from shares or another property in the same year, or carried forward from earlier years.
• Check the principal residence years if you ever lived there, and whether the s.45(2) election was filed.
• Ask an accountant before you list, especially with CCA, a spouse on title, a corporation or a property you also lived in. This page is general information, not tax advice.

Selling your rental on MLS® for a flat fee

• A flat fee MLS® listing puts your rental on the MLS® System and realtor.ca from $99.99 for 2 months, plus HST. You choose what to offer the buyer's agent.
• Tenants in place? Read selling a house with tenants in Ontario: the lease goes with the sale and showings need 24 hours' notice.
• Not sure whether to sell? The rent vs sell calculator compares selling now with renting it out for a few more years, capital gains included.

Capital gains on a rental: questions

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